Lecture 3

1. Lecture 3 External opportunities and threats

2. Strategy Formulation Vision & Mission External Opportunities & Threats Internal Strengths & Weaknesses Long-Term Objectives Alternative Strategies Strategy Selection

3. External Assessment It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. –Charles Darwin Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map. – Wayne Calloway, Former CEO, PepsiCo

4. External Strategic Management Audit Identify & Evaluate factors beyond the control of a single firm • Increased foreign competition • Population shifts • Aging society • Fear of traveling • Stock market volatility • Identify • Opportunities • Threats

5. Key External Forces • Economic forces • Social, cultural, demographic & environmental forces • Political, governmental & legal forces • Technological forces • Competitive forces

6. Key External Forces & the Organization Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services Markets Natural Environment Key External Forces Opportunities & Threats

7. Performing External Audit -- Variables • Commonly use areas requiring analysis in determining opportunities and threats: • Market share • Breadth of competing products • World economies • Foreign affiliates • Proprietary account advantages • Price competitiveness • Technological advancements • Interest rates • Pollution abatement

8. Performing External Audit – factors • Related to long term and annual, objectives • Measurable • Applicable to competitors • Pertain to the overall organisation (wide scope) and to narrow areas or functions within the company.

9. Economic Forces • Trends in the dollar’s value • European Union • Layoffs • Economic standard of living

10. Economic Forces

11. Economic Standard of Living

12. Social, Cultural, Demographic & Environmental Forces • Major Impact – • Products • Services • Markets • Customers

13. Social, Cultural, Demographic & Environmental Forces • U.S. Facts • Aging population • Less Caucasian • Widening gap between rich & poor • 2025 = 18.5% population >65 years • 2075 = no ethnic or racial majority

14. Social, Cultural, Demographic & Environmental Forces • Facts • World population approaching 7 billion • World population = 8 billion by 2028 • World population = 9 billion by 2054 • U.S. population < 300 million

15. Social, Cultural, Demographic & Environmental Forces • Local Trends • More American households with people living alone • By 2021 Hispanics will be largest minority group • Aging Americans – affects all organizations • Population shift to the south and west • Less interested in fitness and exercise • Decimation and degradation of the natural environment

16. Social, Cultural, Demographic & Environmental Forces • Global trends • China largest exporter to U.S. • Asia receives highest foreign direct investment • China and Asia provide cheaper labor and utilities than Mexico • China joined WTO

17. Social, Cultural, Demographic & Environmental Forces 21st Century Trends • More educated consumers • Aging population • Minorities more influential • Local rather than federal solutions • Fixation with youth decreasing • Hispanics increase to 15% by 2021 • African American increase to 14% by 2021

18. Social, Cultural, Demographic & Environmental Forces • Sample of variables that should be monitored : • Number of Births and deaths, • immigration and emigration rates • Average disposable income • Ethical Concerns • Average educational level • Government regulation • Social responsibility • Air and Water pollution • Ozone Depletion

19. Competitive Forces Sources of Corporate Information • Moody’s Manuals • Standard Corporation Descriptions • Value Line Investment Surveys • Dun’s Business Rankings • Standard & Poor’s Industry Surveys • Industry Week • Forbes, Fortune, Business Week

20. Competitive Forces 7 Characteristics of most Competitive U.S. Firms: • Market share matters • Understand what business you are in • Broke or not, fix it • Innovate or evaporate

21. Competitive Forces 7 Characteristics of most Competitive U.S. Firms: • Acquisition is essential to growth • People make a difference • No substitute for quality

22. The Five-Forces Model of Competition Potential development of substitute products Rivalry among competing firms Bargaining power of suppliers Bargaining power of consumers Potential entry of new competitors

23. Steps to Determine if an Acceptable Profit Can be Earned • Identify key aspects or elements of each competitive force • Evaluate how strong and important each element is for the firm • Decide whether the collective strength of the elements is worth the firm entering or staying in the industry

24. The Five-Forces Model Rivalry Among Competing Firms • Most powerful of the five forces • Focus on competitive advantage of strategies

25. The Five-Forces Model Potential Entry of New Competitors • Barriers to entry are important • Quality, pricing, and marketing can overcome barriers

26. The Five-Forces Model Potential Development of Substitute Products • Pressures increase when consumer’s switching costs decrease • Firm’s plans for increased capacity & market penetration

27. The Five-Forces Model Bargaining Power of Suppliers • Large number of suppliers & few substitutes affects intensity of competition • Backward integration can gain control or ownership of suppliers

28. The Five-Forces Model Bargaining Power of Consumers • Customers concentrated or buying in volume affects intensity of competition • Consumer power is higher where products are standard or undifferentiated

29. Conditions where Consumers GainBargaining Power • If they can inexpensively switch • If they are particularly important • If sellers are struggling in the face of falling consumer demand • If they are informed about seller’s products, prices and costs. • If they have discretion in whether and when they purchase the product.

30. Forecasting Tools and Techniques • Forecasts are educated assumptions about future trends and events • Quantitative techniques – Most appropriate when historical data is available and there is a constant relationship • Qualitative techniques

31. External Audit: Dell • Opportunities • Demand for personal computers continues to grow. • Many customers switching from desktops to notebooks. • Microsoft desires to partner with Dell. • Consumer electronics is a profitable business. • Higher consumer spending in the US. • Incorporated managed and professional services. • Global enterprise systems. • Training and certification program. • Financial services offered. • Growth in the color printer market.

32. External evaluation: Dell • Threats • Consolidation in the PC industry (i.e., Lenove Group Ltd. of China purchase PC division of IBM in May 2005). • Higher oil prices could crimp consumers’ spending. • Commercial demand fails to accelerate. • Competitors are strong. • Slow growth in the PC market. • Component price fluctuation • Price for computing power has decreased. • Computer market has broadened. • Currency fluctuations in the international markets.

33. Economic Demographic Governmental Social Environmental Technological Cultural Political Competitive Industry Analysis: The External Factor Evaluation (EFE) Matrix Summarize & Evaluate

36. Industry Analysis EFE Total weighted score of 4.0 • Organization response is outstanding to threats and weaknesses Total weighted score of 1.0 • Firm’s strategies not capitalizing on opportunities or avoiding threats

37. Question • Derive an EEM based on the aforementioned opportunities and threats for Dell. (to be completed in class) • Discuss the importance of an the external environment for an organisation and how to evaluate its impact on strategic formulation. • Discuss how a company could evaluate whether it should remain in its current industry or enter a new industry, illustrate your answer with suitable examples .